{"id":13985,"date":"2023-05-26T01:55:20","date_gmt":"2023-05-26T05:55:20","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/another-risk-for-markets-to-consider-debt-ceiling-talks-that-could-stretch-into-feds-june-meeting\/"},"modified":"2023-05-26T01:55:21","modified_gmt":"2023-05-26T05:55:21","slug":"another-risk-for-markets-to-consider-debt-ceiling-talks-that-could-stretch-into-feds-june-meeting","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=13985","title":{"rendered":"Another risk for markets to consider: Debt-ceiling talks that could stretch into Fed\u2019s June meeting"},"content":{"rendered":"
\n

Financial markets outside the Treasury-bill sector were taking a bit of a break from debt-ceiling angst on Thursday, with stock investors mostly focused on a blowout revenue outlook from Nvidia and bond traders looking to the likelihood of at least one more Federal Reserve rate hike by July.<\/p>\n

With many market participants confident that a debt-ceiling pact can be reached next week, analysts said there\u2019s yet another scenario that might unfold: A prolonged debt-ceiling battle that stretches into the Fed\u2019s June 13-14 meeting in Washington.<\/p>\n

\n

At the heart of their thinking is the idea that the \u201cX-date,\u201d or when the government could fall short on funding without a debt-limit deal, might be more fluid than thought. Treasury Secretary Janet Yellen has repeatedly cited June 1 as the earliest that her department might not be able to pay all its bills, though Republicans are skeptical of that timetable. Some economists, such as Derek Tang of Monetary Policy Analytics and Paul Ashworth at Capital Economics, see reasons to think that the actual X-date could arrive later next month.<\/p>\n

\u201cIt\u2019s possible that negotiators in Washington will still be talking about the debt ceiling in a couple of weeks, and Treasury has some tools it can use to fudge the X-date if necessary,\u201d said Bill Adams, chief economist for Comerica Bank in Dallas.<\/p>\n

Republicans and Democrats are angling over whether to include spending cuts in any bipartisan agreement to raise the U.S.\u2019s $31.4 trillion debt ceiling. The statutory borrowing limit was reached in January, prompting Treasury to take extraordinary measures in the meantime. Republicans want spending cuts in exchange for a deal, while Biden and other Democrats are against that and favor a \u201cclean\u201d debt-limit increase.<\/p>\n

Under a scenario in which there\u2019s no deal by mid-June and the U.S. hasn\u2019t yet defaulted, \u201cI think, counterintuitively, that the Fed will still hike if the inflation outlook justifies hiking in June,\u201d Adams said via phone on Thursday.<\/p>\n

\u201cIn the past, debt-ceiling negotiations haven\u2019t had a meaningful impact on the economy over the time frame that the Fed cares about, which is six to 18 months down the road,\u201d he said. \u201cI wouldn\u2019t expect that to stop them. The only thing that would change that is if the situation deteriorates into an outright crisis that causes major disruptions in the financial system and a big drop in business and consumer sentiment.\u201d<\/p>\n

As of Thursday, both sides of the debt-ceiling fight were putting a positive spin on the negotiations, with President Joe Biden and House Speaker Kevin McCarthy both emphasizing the progress that\u2019s being made. U.S. stocks
\n DJIA,
\n -0.11%<\/bg-quote><\/p>\n

SPX,
\n +0.88%<\/bg-quote><\/p>\n

COMP,
\n +1.71%<\/bg-quote>
\n finished mostly higher, as did Treasury yields. Meanwhile, fed funds futures traders priced in a 48% chance of a quarter-point rate Fed hike in June and, assuming that takes place, a 22.7% likelihood of similar move in July.<\/p>\n

Debt-ceiling angst has largely been contained to the T-bills sector, where rates on bills maturing from June 1-8 hovered between 6.74% to 6.86% earlier in the day, according to Tradeweb. <\/p>\n

Tang of Monetary Policy Analytics, a Washington-based firm that works with hedge funds and global banks, said the research firms he speaks to are coalescing around an X-date that lands somewhere \u201cin the first half of June.\u201d He said there is \u201cabsolutely\u201d a risk that there may be no debt-ceiling deal in place by the time the rate-setting Federal Open Market Committee convenes in Washington, though his base-case view is that there will be. <\/p>\n

The minutes of the Fed\u2019s May 2-3 meeting, released on Wednesday, also mention the possibility that the actual X-date might come \u201ca number of weeks\u201d after June 1.<\/p>\n

At Capital Economics, Ashworth, chief North America economist, said the standoff in Washington \u201cwill probably now drag on into early June,\u201d though he added some caveats to that statement. \u201cIf the Treasury makes it through the first two days of next month, it will be close to broke and a payment could be missed at any time,\u201d he wrote in a note on Thursday. <\/p>\n

\u201cThat said, if \u2014 by some small miracle \u2014 it can somehow make it to June 15, quarterly tax revenues due that day \u2014 of close to $100 billion \u2014 would ease the pressure and, in all likelihood, the Treasury would then make it to June 30, when it can access close to $150 billion in additional extraordinary measures,\u201d Ashworth said. <\/p>\n

\u201cThe upshot is that, if the Treasury can make it through the first half of June, it would probably not run out of money again until late July or even early August. But that\u2019s an increasingly big if.\u201d<\/p>\n

If the debt-ceiling issue is still not resolved by June 13-14, and the U.S. hasn\u2019t yet defaulted on its obligations, the Fed might be inclined to skip a rate hike at next month\u2019s meeting, even if inflation and other economic data are strong enough to justify another move, \u201cgiven the potential downside risks to the economy, not knowing the problems that a potential default could unleash,\u201d said Scott Buchta, head of fixed income strategy for Brean Capital in Franklin, Tennessee.<\/p>\n

\u201cYou hope it wouldn\u2019t go that far, but at this point you really can\u2019t rule anything out,\u201d Buchta said via phone. \u201cYou almost have to figure a small probability for a lot of different scenarios.\u201d<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Financial markets outside the Treasury-bill sector were taking a bit of a break from debt-ceiling angst on Thursday, with stock investors mostly focused on a blowout revenue outlook from Nvidia and bond traders looking to the likelihood of at least one more Federal Reserve rate hike by July. 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